(Repeat for additional subscribers)
May 21 (The following statement was released by the rating agency)
European credit investors are refocused on geopolitical risk as emerging markets concerns continue to supplant the eurozone sovereign debt crisis as the biggest threats to European credit markets, according to Fitch Ratings' latest quarterly survey. However, they think yield chasing may explain the rally in peripheral eurozone sovereign bonds seen in the first four months of the year.
The Ukraine crisis has highlighted geopolitical risk, which 82% of respondents think poses a high risk to European credit markets over the next 12 months. That's nearly double the 45% figure in our previous survey, which closed shortly before the Ukraine crisis erupted.
The perceived risk from emerging markets remains high, while that associated with the eurozone sovereign debt crisis fell over the quarter. 71% of respondents think that adverse developments in one or more emerging markets are a high risk, up from 68% in 1Q14 and well above the 51% who identified EMs as a high risk in 4Q13.
The proportion that thinks eurozone sovereign debt problems are a high risk to European credit markets fell to 26% in 2Q14, from 39% in the previous survey. That's the lowest reading in four years, and extends a steady decline from 83% a year ago. The perceived risk posed by a prolonged recession is at a three-year low, with 33% of investors rating it high, down from 86% a year ago.
However, respondents are sceptical about whether the eurozone's recovery justifies the strong tightening in peripheral spreads between January and April. A majority - 55% - think investors are chasing returns and are not being properly compensated for the risk they are taking. Just 20% think the tightening is because eurozone tail risks are now negligible.
In Fitch's view, the easing of the eurozone crisis and the recovery of some individual sovereigns has been reflected in a number of positive rating actions for sovereigns in the periphery this year. While these reflect some improving credit fundamentals, credit weaknesses persist, including large budget deficits and high debt burdens, high external debt, subdued growth potential, weak bank asset quality, and the risks of political or financing shocks.
Even with better economic conditions and strong fiscal discipline, cutting deficits and stabilising then reducing public debt ratios will be challenging, and we do not expect sovereign ratings for countries that saw multiple downgrades in the crisis to return to pre-crisis levels for the foreseeable future.
For a full discussion of the possible course of eurozone peripheral sovereign ratings, see Eurozone Periphery: Rating Recovery Potential, available at www.fitchratings.com. Our continuing commentary on the implications of the Ukraine crisis and on economic and political developments in emerging markets, including the so-called Fragile Five, is also available on our website.
Fitch's 2Q14 survey closed on 16 May. It represents the views of managers of an estimated EUR5.3trn of fixed income assets. We will publish the full results next week.